Chapter 11

Question 1

Fiscal policy refers to:

Answer 1

changes in taxes and government purchases made by legislation for the purpose of stabilizing the economy

Question 2

Fiscal policy refers to the:

Answer 2

manipulation of government purchases and taxes for the purpose of stabilizing real output, employment, and the price level

Question 3

Which of the following statements is correct?

Answer 3

Government purchases increase, but taxes decrease, real output.

Question 4

When equilibrium occurs at point a, the economy is exhibiting a(n):

Answer 4

recessionary gap of ab, which calls for expansionary fiscal policy

Question 5

When equilibrium occurs at point d, the economy is exhibiting a(n):

Answer 5

inflationary gap of cd, which calls for contractionary fiscal policy

Question 6

The effect of a contractionary fiscal policy upon the equilibrium level of real output is substantially the same as a(n):

Answer 6

increase in saving

Question 7

Assume that the economy is operating below its potential output. Under these conditions, government fiscal policy should be directed toward a(n):

Answer 7

increase in government purchases and/or tax cuts

Question 8

Assume that the economy is in the midst of a severe recession. Which of the following policies would be appropriate?

Answer 8

a reduction in federal tax rates on personal and corporate income

Question 9

In a certain year, an economy’s potential output is $280 billion, while its equilibrium real output is expected to be $300 billion. Under these conditions, the government should:

Answer 9

increase tax rates and reduce government purchases

Question 10

An economy faces an inflationary gap. Which of the following is the appropriate government fiscal policy?

Answer 10

an increase in the federal Goods and Services Tax (GST)

Question 11

Economists are in general agreement that fiscal policy will stabilize the economy most when:

Answer 11

deficits are incurred during recessions and surpluses are incurred during booms

Question 12

Fiscal policy that increases the budget deficit has the same impact upon equilibrium output as does a(n):

Answer 12

decrease in imports

Question 13

Automatic stabilizers operate in which of the following ways?

Answer 13

With given tax rates and government spending policies, a rise in GDP will tend to produce a budget surplus, while a decline will tend to result in a deficit.

Question 14

If Parliament adjusted our tax system so that the rate of taxation increased, the:

Answer 14

economy would tend to become more stable

Question 15

A major advantage of automatic stabilizers is that they:

Answer 15

require no legislative action by Parliament to be made effective

Question 16

Which of the following statements best describes automatic stabilizers as they function in Canada?

Answer 16

Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

Question 17

The multiplier effect means that:

Answer 17

an increase in spending can cause aggregate demand to change by a larger amount

Question 18

The marginal propensity to consume is defined as:

Answer 18

the ratio of the change in consumption on domestic items to the change in income